QUESTIONS 1. Calculate Dunham's 1995 financial ratios (See Exhibits 1,2, and 3). 2. Does a trend analysis indicate Dunham's position has been detericrating? (See Exhibit 3.) 3. Is the bank justifiably concerned? Justify your answer. 4. Nineteen ninety-four was a "down" year for Dunham. Do you think that GCB had a responsibility to express concern in 1994, especially since the current ratio was close to 1.85, the number that could trigger a call of the loan? Explain. 5. Suppose Dunham had followed Jensen's 1993 recommendation to lower its payout ratio. Recalculate the firm's debt and current ratios for 1995 assuming that the paycut ratio was 20 peroent from 1993 to 1995 . (Assume that the extra money was used to reduce the firm's notes payable.) 6. (a) Jensen discussed Dunham's situation with Paula Rolinson, an acocunting friend. Rocinson said that, in her opinion, Dunham has "too little long-term capital, especially considering your reoivablesand inventory needs." Why is it frequently appropriate to use a long-term capital scurce like bonds or equity to finance items like inventcry and receivables that appear on a balance sheet as short-term assets? (b) What advantages are there to using short-term debt to finance long-term asscts? What are the disadvantages? tury) ratio could be raised to 54 , the industry average. In addition he has a number of suggestions for reducing Dunham's costs. He believes the company can increase its gross profit margin to 31 percent and reduce selling and administrative expenses to 21.5 peroent of sales. "One reason for cur lousy current ratio is we've gradually taken longer and longer to pay our bills! I've gotten more than one nasty letter in the last year! I'm going to suggest we get payakles to 9 peront of sales, which would becompetitive with other firms." Jensen hasalso been critical of how the company has obtained external funding for the last few years. Virtually all such money has teen supplied by GCB, and Jensen has secretly felt that the tank has been "extremely genercus" in honoring Dunham's loan requests. Personally he believes the firm should have used more equity by eliminating dividend payments and selling more stock. In fact, in 1993 he had recommended that the firm lower its payout ratio from 50 to 20 percent of net income. The proposal received little support then and consequently Jensen hesitates now to propose a reduction in dividends He decides to make any financial forecast assuming the paycut ratio remains at 50 percent. Though Jensen doesn't really think GCB will grant the $675,000 loan request, he telieves that Dunham should not accept the money even if it is offered." B ut maybe I am wrong," he admits. "I will work up a financial forecast tased on these changes and see what the numbers look like." Jensen will present his suggestions at the mecting he has called in 72 hours, and believes "they'll be implemented considering the situation with the tank." Jensen knows that the board wants the $675,000 loan, and if Dunham doesn't show the bank a sclid plan, it will not only have no chance to ottain the $675,000, tut the bank could foreclose on the existing loans. "And maybe, just maybe," he sighs, "if the bank likes cur plan we won't be required to submit a monthly review. I really hate those!" Back at his cffice, Jensen reflects on the mecting with Reardon and the firm's situation. He is annoyed that he had not anticipated the bank's evaluation but feels there is a positive side to the situation. "Perhaps this will give our board the kick in the pants it needs, " he thinks Jensen knows Dunham is in difficulty and has a number of measures he wants implemented. Unfortunately, the board feels the company's problems are largely the result of a poor cosmetics market; the members believe there is little to do but wait CASE 7 LNNHAMOOSMETCS 43 for the "inevitable recovery." Jensen agrees that part of Dunham's problem has been the soft market that has existed for the past two years. However, industry experts agree this decline is over, and there are indications that demand is on the rise. Jensen himself believes a safe prediction is for sales to increase by 10 percent in 1996. JENSEN'S RECOMMENDATIONS He also feels there are a number of changes Dunham can make. When the company realized that demand would be down, it hoped to increase sales with more liberal credit and through a larger inventory that would increase customer selection. Jensen opposed those measures at the timeon the grounds that "they have never worked in the past, and we have a competitive, even generous credit pclicy." At present Dunham hasanespecially large level of inventory and a very high amcunt of reciivables. Jensen believes reoivables should be reduced to 60 days of sales in 1996 and the inventory turnover (sales/inven- Reardon reminds Jensen that theFederal Reserve istightening credit in crder to eliminate inflationary pressures in the economy. This means that loans will becomeharder to ot tain and the bank will be locking at each loan request much morecarefully. Even more serious, the tank has just finished its yearly financial evaluation, and Reardon emphasizes to Jensen that, in her opinion, Dunham's financial position is "poor and seems to be getting worse." She also points out as tactfully as possible that Dunham is violating its loan agreements. For example, cne provision stipulates the current ratio can't fall below 1.85 . A final issue conorns the terms of the company's loans. Jensen tells Reardon that "T am considering whether to restructure the company's debt" and "might request" that the bank take all of Dunham's debt and amortize it over five years. "Of course, this may be unnecessary," he is quick to add. Reardon explains to Jensen that in light of Dunham's difficulties the loan committee would much prefer that any debt be repaid as quickly as possible. This means that (1) the loan committee would prefer not to restructure the debt; and (2) the new loan request, assuming it is even granted, would likely be in the form of a note payalle. However, Reardon does tell Jensen that the bank is willing to "work with you to develop a financial plan satisfactory to all parties." Reardon then suggests they meet again in the near future to discuss the situation further. A few minutes after Jensen leaves, Reardon wonders if she wasn't a bit too "hardline," especially regarding Jensen's request to restructure Dunham's existing debt. She knows that the officer previcusly in charge of the firm's account had raised no red flags with Jensen at last year's annual meeting. This is surprising given the ompany's "off" year in 1994. Prudent banking dictates that an officer express concern over a detericration in a firm's position and sericusly investigate the reasons for any poor performance. And there are possible legal considerations. Suppose that the bank either calls the loan or refuses to allow Dunham to restructure. If, as a result, Dunham ends up in scricus financial difficulties, then it is possible that GCB could be held legally liable for these problems because of the failure to adequately warn Dunham a year ago. Everything considered, Reardon thinks it may well be in the bank's interest to allow Dunham to restructure its existing debt. The new loan request is another matter, however. Although approval of the loan is not out of the question, Dunham will need a very solid and convincing business plan to stand any chance. Back at his cffice, Jensen reflects on the mecting with Reardon and the For the last 26 years, Dunham Cosmetics has obtained virtually all of its business loans from the Graham County Bank (GCB). For the most part, Dunham has been a valued customer, though in 1980 Dunham fell behind in its debt payments when a new line of toiletries was a complete disaster. After this the bank monitored Dunham's financial situation extremely closely, requiring monthly financial statements. As the company's financial situation improved, the bank went to quarterly and-eight years ago, in 1987-yearly evaluations. This was a sign that GCB felt the company was a good credit risk, and in recent years Dunham has had little difficulty obtaining bank financing. In fact, Dunham will seek a $675,000 loan in the near future. It is in the second year of its Equipment Improvement Program and will use the funds to modernize the factory and much of the equipment. The completion of this program is considered vital to the current and future health of the company. Jean Reardon was promoted to corporate banker with GCB four months ago and is the officer in charge of Dunham's account, replacing an officer who apparently was considered too lenient in corporate loan decisions. Reardon has known of Dunham's intended loan request for three weeks, and her initial, reaction was that approval of the loan would be highly probable. Fortunately she never expressed this opinion to Lionel Jensen, Dunham's general manager. She realizes circumstances do change, and it would be very embarrassing to turn down a loan request from a longtime client after hinting such a loan would be "likely." There are a number of factors indicating Dunham will have borrowing difficulties, and she calls a meeting with Jensen to discuss the company's debt situation. \begin{tabular}{|c|c|} \hline \multicolumn{2}{|c|}{\begin{tabular}{l} EXHIBIT 4 \\ \end{tabular}} \\ \hline & \begin{tabular}{l} 1996 Income Stutament \\ of Dhavkm Cosmatiss (000s) \end{tabular} \\ \hline \multirow{8}{*}{\begin{tabular}{l} Sales \\ Cost of goods \\ Gross profit \\ Administrative expenses \\ Depreciation \\ FBT \\ Interest \\ Earnings befcre taxes \\ Taxes \\ Net income \end{tabular}} & \\ \hline & \\ \hline & 568 \\ \hline & \\ \hline & \\ \hline & \\ \hline & \\ \hline & \begin{tabular}{l} 1906 Bolance Shat \\ (000s) \end{tabular} \\ \hline \multicolumn{2}{|l|}{ Assets } \\ \hline \multicolumn{2}{|l|}{ Cash \& marketable securities } \\ \hline \multicolumn{2}{|l|}{ Receivables } \\ \hline \multirow{2}{*}{\multicolumn{2}{|c|}{\begin{tabular}{l} Inventory \\ Current asets \end{tabular}}} \\ \hline & \\ \hline \multicolumn{2}{|l|}{ Gross fixed assets } \\ \hline \multirow{2}{*}{\multicolumn{2}{|c|}{\begin{tabular}{l} Accumulated depreciation \\ Net fixed assets \end{tabular}}} \\ \hline & \\ \hline \multirow{2}{*}{\multicolumn{2}{|c|}{\begin{tabular}{l} Total assets \\ Liabilities and Equity \end{tabular}}} \\ \hline \multirow{2}{*}{\multicolumn{2}{|c|}{\begin{tabular}{l} Labilitis and bruity \\ Notes payable \end{tabular}}} \\ \hline & \\ \hline \multicolumn{2}{|l|}{\begin{tabular}{l} Accounts payable \\ Accruals \end{tabular}} \\ \hline Aconuals & 1366 \\ \hline \multicolumn{2}{|l|}{ Current liabilities } \\ \hline Bonds & 2,066 \\ \hline Commonstock & 4,050 \\ \hline Retained earnings & \\ \hline Total liabilities and equity & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|} \hline \multicolumn{5}{|c|}{\begin{tabular}{c} EXHIBIT 3 \\ Financial Ratios for Dunham Cosmetics \end{tabular}} \\ \hline & 1993 & 1994 & 1995 & \begin{tabular}{c} Industry \\ Average \\ 1993-1995 \end{tabular} \\ \hline \multicolumn{5}{|l|}{ Liquidity } \\ \hline Current & 2.40 & 1.94 & & 1.95 \\ \hline Quick & 1.33 & 1.08 & & 1.00 \\ \hline \multicolumn{5}{|l|}{ Leverage } \\ \hline Debt (%) & 46.00 & 55.00 & & 53.00 \\ \hline Times interest earned & 8.54 & 5.20 & & 5.00 \\ \hline \multicolumn{5}{|l|}{ Activity } \\ \hline Inventory turnover (sales) & 6.25 & 5.10 & & 5.40 \\ \hline Fixed asset turnover & 13.33 & 9.91 & & 10.00 \\ \hline Total asset turnover & 2.30 & 1.82 & & 2.10 \\ \hline Average collection period (days) & 54.00 & 72.70 & & 51.00 \\ \hline \multicolumn{5}{|l|}{ Profitability } \\ \hline Gross profit margin ( %) & 32.00 & 32.00 & & 30.50 \\ \hline Net profit (%) & 4.40 & 3.70 & & 3.00 \\ \hline Return on total assets (\%) & 10.10 & 6.70 & & 6.30 \\ \hline Return on equity (%) & 18.70 & 14.80 & & 13.30 \\ \hline \end{tabular} \begin{tabular}{lccc} \hline & \begin{tabular}{c} EXHIBIT 2 \\ Balance Sheets (O00s) \end{tabular} & \\ \hline & 1993 & 1994 & \begin{tabular}{c} Present Year \\ 1995 \end{tabular} \\ \hline Assets & & & \\ Cash \& marketable securities & $1,264 & $1,237 & $879 \\ Receivables & 3,789 & 5,204 & 5,920 \\ Inventory & 4,042 & 5,102 & 6,133 \\ Current assets & 9,095 & 11,543 & 12,932 \\ Gross fixed assets & 3,024 & 4,123 & 5,337 \\ Accumulated depreciation & (1,129) & (1,521) & (2,001) \\ Net fixed assets & 1,895 & 2,601 & 3,336 \\ Total assets & 10,990 & 14,144 & 16,268 \\ Liabilities and Equity & $1,111 & $1,804 & $2,400 \\ Notes payable & 2,021 & 3,126 & 3,866 \\ Accounts payable & 656 & 1,010 & 1,334 \\ Accruals & 3,788 & 5,940 & 7,600 \\ Current liabilities & 1,254 & 1,781 & 2,066 \\ Term loans & 4,050 & 4,050 & 4,050 \\ Common stock & 1,898 & 2,373 & 2,552 \\ Retained earnings & 10,990 & 14,144 & 16,268 \\ Total liabilities and equity & & & \\ \hline \end{tabular} EXHIBIT 1 Income Statements (000s) \begin{tabular}{|c|c|c|c|} \hline & 1993 & 1994 & \begin{tabular}{c} Present year \\ 1995 \end{tabular} \\ \hline Sales & $25,264 & $25,769 & $26,671 \\ \hline Cost of goods & 17,180 & 17,508 & 18,793 \\ \hline Gross profit & 8,084 & 8,261 & 7,878 \\ \hline Administrative expenses & 5,254 & 5,516 & 6,068 \\ \hline Depreciation & 302 & 393 & 479 \\ \hline EBIT & 2,528 & 2,352 & 1,331 \\ \hline Interest & 296 & 451 & 578 \\ \hline Earnings before taxes & 2,232 & 1,901 & 753 \\ \hline Taxes (50%) & 1,116 & 951 & 377 \\ \hline Net income & 1,116 & 950 & 376 \\ \hline Common stock dividends & 5581,110 & 475 & 188 \\ \hline Retained earnings & 558 & 475 & 188 \\ \hline \end{tabular} QUESTIONS 1. Calculate Dunham's 1995 financial ratios (See Exhibits 1,2, and 3). 2. Does a trend analysis indicate Dunham's position has been detericrating? (See Exhibit 3.) 3. Is the bank justifiably concerned? Justify your answer. 4. Nineteen ninety-four was a "down" year for Dunham. Do you think that GCB had a responsibility to express concern in 1994, especially since the current ratio was close to 1.85, the number that could trigger a call of the loan? Explain. 5. Suppose Dunham had followed Jensen's 1993 recommendation to lower its payout ratio. Recalculate the firm's debt and current ratios for 1995 assuming that the paycut ratio was 20 peroent from 1993 to 1995 . (Assume that the extra money was used to reduce the firm's notes payable.) 6. (a) Jensen discussed Dunham's situation with Paula Rolinson, an acocunting friend. Rocinson said that, in her opinion, Dunham has "too little long-term capital, especially considering your reoivablesand inventory needs." Why is it frequently appropriate to use a long-term capital scurce like bonds or equity to finance items like inventcry and receivables that appear on a balance sheet as short-term assets? (b) What advantages are there to using short-term debt to finance long-term asscts? What are the disadvantages? tury) ratio could be raised to 54 , the industry average. In addition he has a number of suggestions for reducing Dunham's costs. He believes the company can increase its gross profit margin to 31 percent and reduce selling and administrative expenses to 21.5 peroent of sales. "One reason for cur lousy current ratio is we've gradually taken longer and longer to pay our bills! I've gotten more than one nasty letter in the last year! I'm going to suggest we get payakles to 9 peront of sales, which would becompetitive with other firms." Jensen hasalso been critical of how the company has obtained external funding for the last few years. Virtually all such money has teen supplied by GCB, and Jensen has secretly felt that the tank has been "extremely genercus" in honoring Dunham's loan requests. Personally he believes the firm should have used more equity by eliminating dividend payments and selling more stock. In fact, in 1993 he had recommended that the firm lower its payout ratio from 50 to 20 percent of net income. The proposal received little support then and consequently Jensen hesitates now to propose a reduction in dividends He decides to make any financial forecast assuming the paycut ratio remains at 50 percent. Though Jensen doesn't really think GCB will grant the $675,000 loan request, he telieves that Dunham should not accept the money even if it is offered." B ut maybe I am wrong," he admits. "I will work up a financial forecast tased on these changes and see what the numbers look like." Jensen will present his suggestions at the mecting he has called in 72 hours, and believes "they'll be implemented considering the situation with the tank." Jensen knows that the board wants the $675,000 loan, and if Dunham doesn't show the bank a sclid plan, it will not only have no chance to ottain the $675,000, tut the bank could foreclose on the existing loans. "And maybe, just maybe," he sighs, "if the bank likes cur plan we won't be required to submit a monthly review. I really hate those!" Back at his cffice, Jensen reflects on the mecting with Reardon and the firm's situation. He is annoyed that he had not anticipated the bank's evaluation but feels there is a positive side to the situation. "Perhaps this will give our board the kick in the pants it needs, " he thinks Jensen knows Dunham is in difficulty and has a number of measures he wants implemented. Unfortunately, the board feels the company's problems are largely the result of a poor cosmetics market; the members believe there is little to do but wait CASE 7 LNNHAMOOSMETCS 43 for the "inevitable recovery." Jensen agrees that part of Dunham's problem has been the soft market that has existed for the past two years. However, industry experts agree this decline is over, and there are indications that demand is on the rise. Jensen himself believes a safe prediction is for sales to increase by 10 percent in 1996. JENSEN'S RECOMMENDATIONS He also feels there are a number of changes Dunham can make. When the company realized that demand would be down, it hoped to increase sales with more liberal credit and through a larger inventory that would increase customer selection. Jensen opposed those measures at the timeon the grounds that "they have never worked in the past, and we have a competitive, even generous credit pclicy." At present Dunham hasanespecially large level of inventory and a very high amcunt of reciivables. Jensen believes reoivables should be reduced to 60 days of sales in 1996 and the inventory turnover (sales/inven- Reardon reminds Jensen that theFederal Reserve istightening credit in crder to eliminate inflationary pressures in the economy. This means that loans will becomeharder to ot tain and the bank will be locking at each loan request much morecarefully. Even more serious, the tank has just finished its yearly financial evaluation, and Reardon emphasizes to Jensen that, in her opinion, Dunham's financial position is "poor and seems to be getting worse." She also points out as tactfully as possible that Dunham is violating its loan agreements. For example, cne provision stipulates the current ratio can't fall below 1.85 . A final issue conorns the terms of the company's loans. Jensen tells Reardon that "T am considering whether to restructure the company's debt" and "might request" that the bank take all of Dunham's debt and amortize it over five years. "Of course, this may be unnecessary," he is quick to add. Reardon explains to Jensen that in light of Dunham's difficulties the loan committee would much prefer that any debt be repaid as quickly as possible. This means that (1) the loan committee would prefer not to restructure the debt; and (2) the new loan request, assuming it is even granted, would likely be in the form of a note payalle. However, Reardon does tell Jensen that the bank is willing to "work with you to develop a financial plan satisfactory to all parties." Reardon then suggests they meet again in the near future to discuss the situation further. A few minutes after Jensen leaves, Reardon wonders if she wasn't a bit too "hardline," especially regarding Jensen's request to restructure Dunham's existing debt. She knows that the officer previcusly in charge of the firm's account had raised no red flags with Jensen at last year's annual meeting. This is surprising given the ompany's "off" year in 1994. Prudent banking dictates that an officer express concern over a detericration in a firm's position and sericusly investigate the reasons for any poor performance. And there are possible legal considerations. Suppose that the bank either calls the loan or refuses to allow Dunham to restructure. If, as a result, Dunham ends up in scricus financial difficulties, then it is possible that GCB could be held legally liable for these problems because of the failure to adequately warn Dunham a year ago. Everything considered, Reardon thinks it may well be in the bank's interest to allow Dunham to restructure its existing debt. The new loan request is another matter, however. Although approval of the loan is not out of the question, Dunham will need a very solid and convincing business plan to stand any chance. Back at his cffice, Jensen reflects on the mecting with Reardon and the For the last 26 years, Dunham Cosmetics has obtained virtually all of its business loans from the Graham County Bank (GCB). For the most part, Dunham has been a valued customer, though in 1980 Dunham fell behind in its debt payments when a new line of toiletries was a complete disaster. After this the bank monitored Dunham's financial situation extremely closely, requiring monthly financial statements. As the company's financial situation improved, the bank went to quarterly and-eight years ago, in 1987-yearly evaluations. This was a sign that GCB felt the company was a good credit risk, and in recent years Dunham has had little difficulty obtaining bank financing. In fact, Dunham will seek a $675,000 loan in the near future. It is in the second year of its Equipment Improvement Program and will use the funds to modernize the factory and much of the equipment. The completion of this program is considered vital to the current and future health of the company. Jean Reardon was promoted to corporate banker with GCB four months ago and is the officer in charge of Dunham's account, replacing an officer who apparently was considered too lenient in corporate loan decisions. Reardon has known of Dunham's intended loan request for three weeks, and her initial, reaction was that approval of the loan would be highly probable. Fortunately she never expressed this opinion to Lionel Jensen, Dunham's general manager. She realizes circumstances do change, and it would be very embarrassing to turn down a loan request from a longtime client after hinting such a loan would be "likely." There are a number of factors indicating Dunham will have borrowing difficulties, and she calls a meeting with Jensen to discuss the company's debt situation. \begin{tabular}{|c|c|} \hline \multicolumn{2}{|c|}{\begin{tabular}{l} EXHIBIT 4 \\ \end{tabular}} \\ \hline & \begin{tabular}{l} 1996 Income Stutament \\ of Dhavkm Cosmatiss (000s) \end{tabular} \\ \hline \multirow{8}{*}{\begin{tabular}{l} Sales \\ Cost of goods \\ Gross profit \\ Administrative expenses \\ Depreciation \\ FBT \\ Interest \\ Earnings befcre taxes \\ Taxes \\ Net income \end{tabular}} & \\ \hline & \\ \hline & 568 \\ \hline & \\ \hline & \\ \hline & \\ \hline & \\ \hline & \begin{tabular}{l} 1906 Bolance Shat \\ (000s) \end{tabular} \\ \hline \multicolumn{2}{|l|}{ Assets } \\ \hline \multicolumn{2}{|l|}{ Cash \& marketable securities } \\ \hline \multicolumn{2}{|l|}{ Receivables } \\ \hline \multirow{2}{*}{\multicolumn{2}{|c|}{\begin{tabular}{l} Inventory \\ Current asets \end{tabular}}} \\ \hline & \\ \hline \multicolumn{2}{|l|}{ Gross fixed assets } \\ \hline \multirow{2}{*}{\multicolumn{2}{|c|}{\begin{tabular}{l} Accumulated depreciation \\ Net fixed assets \end{tabular}}} \\ \hline & \\ \hline \multirow{2}{*}{\multicolumn{2}{|c|}{\begin{tabular}{l} Total assets \\ Liabilities and Equity \end{tabular}}} \\ \hline \multirow{2}{*}{\multicolumn{2}{|c|}{\begin{tabular}{l} Labilitis and bruity \\ Notes payable \end{tabular}}} \\ \hline & \\ \hline \multicolumn{2}{|l|}{\begin{tabular}{l} Accounts payable \\ Accruals \end{tabular}} \\ \hline Aconuals & 1366 \\ \hline \multicolumn{2}{|l|}{ Current liabilities } \\ \hline Bonds & 2,066 \\ \hline Commonstock & 4,050 \\ \hline Retained earnings & \\ \hline Total liabilities and equity & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|} \hline \multicolumn{5}{|c|}{\begin{tabular}{c} EXHIBIT 3 \\ Financial Ratios for Dunham Cosmetics \end{tabular}} \\ \hline & 1993 & 1994 & 1995 & \begin{tabular}{c} Industry \\ Average \\ 1993-1995 \end{tabular} \\ \hline \multicolumn{5}{|l|}{ Liquidity } \\ \hline Current & 2.40 & 1.94 & & 1.95 \\ \hline Quick & 1.33 & 1.08 & & 1.00 \\ \hline \multicolumn{5}{|l|}{ Leverage } \\ \hline Debt (%) & 46.00 & 55.00 & & 53.00 \\ \hline Times interest earned & 8.54 & 5.20 & & 5.00 \\ \hline \multicolumn{5}{|l|}{ Activity } \\ \hline Inventory turnover (sales) & 6.25 & 5.10 & & 5.40 \\ \hline Fixed asset turnover & 13.33 & 9.91 & & 10.00 \\ \hline Total asset turnover & 2.30 & 1.82 & & 2.10 \\ \hline Average collection period (days) & 54.00 & 72.70 & & 51.00 \\ \hline \multicolumn{5}{|l|}{ Profitability } \\ \hline Gross profit margin ( %) & 32.00 & 32.00 & & 30.50 \\ \hline Net profit (%) & 4.40 & 3.70 & & 3.00 \\ \hline Return on total assets (\%) & 10.10 & 6.70 & & 6.30 \\ \hline Return on equity (%) & 18.70 & 14.80 & & 13.30 \\ \hline \end{tabular} \begin{tabular}{lccc} \hline & \begin{tabular}{c} EXHIBIT 2 \\ Balance Sheets (O00s) \end{tabular} & \\ \hline & 1993 & 1994 & \begin{tabular}{c} Present Year \\ 1995 \end{tabular} \\ \hline Assets & & & \\ Cash \& marketable securities & $1,264 & $1,237 & $879 \\ Receivables & 3,789 & 5,204 & 5,920 \\ Inventory & 4,042 & 5,102 & 6,133 \\ Current assets & 9,095 & 11,543 & 12,932 \\ Gross fixed assets & 3,024 & 4,123 & 5,337 \\ Accumulated depreciation & (1,129) & (1,521) & (2,001) \\ Net fixed assets & 1,895 & 2,601 & 3,336 \\ Total assets & 10,990 & 14,144 & 16,268 \\ Liabilities and Equity & $1,111 & $1,804 & $2,400 \\ Notes payable & 2,021 & 3,126 & 3,866 \\ Accounts payable & 656 & 1,010 & 1,334 \\ Accruals & 3,788 & 5,940 & 7,600 \\ Current liabilities & 1,254 & 1,781 & 2,066 \\ Term loans & 4,050 & 4,050 & 4,050 \\ Common stock & 1,898 & 2,373 & 2,552 \\ Retained earnings & 10,990 & 14,144 & 16,268 \\ Total liabilities and equity & & & \\ \hline \end{tabular} EXHIBIT 1 Income Statements (000s) \begin{tabular}{|c|c|c|c|} \hline & 1993 & 1994 & \begin{tabular}{c} Present year \\ 1995 \end{tabular} \\ \hline Sales & $25,264 & $25,769 & $26,671 \\ \hline Cost of goods & 17,180 & 17,508 & 18,793 \\ \hline Gross profit & 8,084 & 8,261 & 7,878 \\ \hline Administrative expenses & 5,254 & 5,516 & 6,068 \\ \hline Depreciation & 302 & 393 & 479 \\ \hline EBIT & 2,528 & 2,352 & 1,331 \\ \hline Interest & 296 & 451 & 578 \\ \hline Earnings before taxes & 2,232 & 1,901 & 753 \\ \hline Taxes (50%) & 1,116 & 951 & 377 \\ \hline Net income & 1,116 & 950 & 376 \\ \hline Common stock dividends & 5581,110 & 475 & 188 \\ \hline Retained earnings & 558 & 475 & 188 \\ \hline \end{tabular}